More evidence for a housing bubble?

At least 70,800 apartment units were sold to condominium developers nationwide in 2004, up from 7,800 in 2002, according to Real Capital Analytics, a New York consulting firm.

As of June 1, at least 43,900 units have been sold to developers this year, says Dan Fasulo, director of market analysis for the firm. There are about 19 million rental apartments in the USA.

The conversions are occurring most rapidly in Southern California, Northern Virginia and the Miami and Las Vegas areas.

Here is the full story.  Might this suggest that rentals are underpriced relative to ownership?  Well…many of these condos end up back on the rental market.  What are the belief options? 

1. The condo market (does it have more fools?) is more bubbly than the market for rentable real estate, and entrepreneurs are arbitraging this difference.  Stupid people are holding condos and renting them out, rather than flipping them, under the belief that prices will rise for the indefinite future. 

2. The tax benefits of owning are higher in the condo market, but there is a fixed cost to conversion.  As real estate prices rise, it becomes more worthwhile to pursue these tax benefits, and thus we see more conversions.

Stay tuned…


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